Tax reform in Belgium 2014/2015

The following new tax measures have been announced in the framework of the Belgian government formation and the budget for 2015, on which an agreement was reached in the second week of October 2014:

As a general remark, the government focuses on mutual trust between the tax authorities and taxpayers. Further, until now, the notional interest deduction regime remains in place (except in respect of banks and institutional companies there would be some changes).

The bill of 28 November 2014 was approved and enacted on 19 December 2014, as published in the Official Gazette of 29 December 2014. During the second reading of the bill of 28 November 2014 it was decided to postpone the limitation of notional interest deduction for regulated financial institutions. A new bill in this respect would be issued in the weeks to come.

Entities - companies - corporate income tax

The following measures are enacted by the Act of 19 December 2014:

Secret commission taxation: the so-called secret commission tax of 309% (due on amounts which have not been properly filed on salary slips, and fee forms and due on hidden profits) is limited to 103%. The rate is further limited to 51,5% in case it can be demonstrated that the beneficiary of the income is a legal entity, or that the hidden profits are recorded in later financial accounts, to the extent the taxpayer has not been informed (in written) on the ongoing tax audit. Further, the secret commissions tax does not apply to the extent the hidden profits are the result of a disallowance professional expense. The secret commissions tax does not apply in case it can be demonstrated that the beneficiary properly has declared the income. Further, in case the income was not properly declared by the beneficiary, no secret commissions tax is levied if the beneficiary is identified at the latest within 2 years and 6 months following 1 January of the tax year concerned. The secret commission taxation itself is tax deductible but it it depends on the situation at hand whether or not the underlying cost is tax deductible.

Entry into force: This measure is applicable as from 29 December 2014 and is applicable on all disputes that are not finally settled on that date.

The Act of 19 December 2014 stipulates that intermunicipal entities, collaborations and project associations are no longer automatically exempt by law from corporate income tax and subject to legal entities. The entities at hand could be subject to corporate income tax or legal entities tax, depending on certain criteria (whether or not the perform activities with a profitable nature, the way they do business etc.)

Entry into force: The measure is applicable as from tax year 2015, on financial years that are closed at the earliest on 1 July 2015.

Taxes on dividends: SMEs are allowed to form a so-called liquidation reserve. The liquidation reserve can be created via requalifying (part) of the account profit after tax to a separate account on the liabilities side of the balance sheet. The creation of this liquidation reserve is subject to a 10% corporate income tax. In case the liquidation reserve would be distributed before liquidation of the company, an extra tax, being a withholding tax, of 15% would be due in case of distribution within 5 years after creation of the liquidation reserve. A withholding tax of 5% would be due in case of distribution of the liquidation reserve after 5 years of its creation. No withholding tax is due in case the liquidation reserve is distributed upon liquidation. In case the “condition of intangibility” is not respected, can no longer benefit from the reduced withholding tax rates upon distribution.

Entry into force: The measure is applicable as from tax year 2015 (financial years ending between 31 December 2014 and 30 December 2015, both dates included).

The following measures are announced in the framework of the Belgian government formation and the budget for 2015, but are not yet enacted or mentioned in a bill:

The basis for notional interest deduction for regulated financial institutions would be reduced with the additional equity requirements as a result of the Basel III agreements.

General Belgian anti-abuse measure: confirmation that the Ruling Office can issue rulings on the general anti-abuse rule. In addition, an assessment (and if needed adaptation) would be implemented in respect of the general anti-abuse rule in order to increase legal certainty for the taxpayer.

Disallowed expenses: simplification of disallowed expenses (divided into three categories: (i) penalties and taxes, (ii) liberalities and (iii) non-individualised benefits) and streamlining of the concepts of disallowed expenses in the framework of corporate income tax and VAT.

The federal tax code would be simplified and coordinated.

“Tax pact”: conclusion of a ‘tax pact” to eliminate the factor of uncertainty in the economic and fiscal environment for entrepreneurs.

Catch all clause: Belgian companies are in principle required to levy a professional withholding tax on qualifying fees attributed or made payable as from 1 March 2013 to certain types of non-residents. These payments may be subject to an effective professional withholding tax of 16,5% - which needs to be levied at source by the Belgian company - unless the applicable double tax treaty foresees in a reduced rate. In this context, the “perverse” side effect would be removed.

Assessment (and possible expansion) of the Belgian patent income deduction regime with regard to software licenses.

Individuals - personal income tax

A. Federal tax measures

Lump-sum amount of professional expenses for employees: the lump-sum amount would be increased and would result in a higher net income for employees as of January 2015. The increase in lump-sum professional expenses (as included in the Program Law of 19 December 2014, ), will be partially implemented in the new tax scales (and thus processed via the monthly payroll). Full implementation should be achieved as of January 2016.

Tax reductions: various federal tax reductions, such as pension savings, the tax exempt amount for interests of savings deposits, gifts etc., would no longer be subject to indexation during the tax years 2015 up to 2018 (income years 2014 up to 2017) and would be frozen (“standstill”) at the level of the amounts applicable for assessment year 2014 (income year 2013). However, the tax reduction for pension or replacement income will still be indexed for tax year 2015 (income year 2014) and will then be frozen.

Tax reduction for pension savings: the maximum qualifying amount of the tax reduction for pension savings will be frozen at the level of income year 2013 (EUR 940). For taxpayers who have already paid an amount of 950 EUR (initially indexed amount for income year 2014), the excess amount of 10 EUR paid during 2014 cannot be taken into account for a tax reduction with respect to income year 2014. However, the excess amount (maximum 10 EUR) would be automatically transferred to income year 2015. It will be considered as “paid during income year 2015” (and thus further qualify for tax relief in 2015).

Taxation of certain pension savings (third pillar pension) will be modified. The tax was set at 10%. However, it will be reduced to 8%. Furthermore, the tax will be collected at an earlier point in time, meaning that a 1% tax would be levied anticipatively during each of the next 5 years (2015 up to 2019) and, when the beneficiary reaches the age of 60, the (remaining) tax due will be (limited to) 3%.

Fiscal work bonus: the tax measure which includes the anticipated increase (laid down in the Law of 15 May 2014) of the fiscal work bonus from 14,40 % to 20,15% (on 1 January 2015) with a maximum of 280 EUR and to 25,91% (on 1 January 2017) with a new maximum of 360 EUR will be postponed for a period of one year. However, the percentage of the fiscal work bonus will be increased to 25,91 % with a maximum of 360 EUR as from 1 January 2016.

"Look-through" tax (or "Cayman tax"): the shareholder or beneficiary (Belgian individual) of certain low-taxed entities or trusts would be taxed on the income of the low-taxed entity or trust, even if the income was not (yet) distributed to the individual. It was announced that during the spring of 2015 the Federal Government would take the first steps in developing this “Cayman tax”. Inspiration will be sought in the existing British and Dutch examples of similar taxes.

Continuation of the partial exemption for transferring wage withholding taxes on the wages for qualifying researches.

Harmonisation of the notion of remuneration both for social and tax law

For income year 2015, the formula for calculating the taxable benefit in kind for the private use of a company car in the hands of company directors and employees remains unchanged. However, the reference CO2 emission for this calculation has been updated via the Royal Decree dated 16 December 2014 as follows:

Regional tax reduction for burglary and fire: the tax reduction for expenses made with regard to the security of a home against burglary and fire will be abolished as from income year 2015 (assessment year 2016). Consequently, only expenses made until 31 December 2014 will be eligible for this tax reduction.

Regional tax reduction for an ‘own dwelling’- mortgage loans concluded as from 1 January 2015: the tax reduction in relation to interest payments and capital redemptions for an ‘own dwelling’ will be fixed at 40% for mortgage loans concluded as of 1 January 2015. Moreover, for these loans the maximum qualifying amount of the tax reduction will be reduced with EUR 760 per taxpayer.

Regional tax reduction for an ‘own dwelling’ – mortgage loans concluded up to 31 December 2014: for mortgage loans concluded up to 31 December 2014 for an own dwelling, the tax reduction will still be granted at the marginal income tax rate (maximum 50%).

Regional tax reduction for an ‘own dwelling’: non-indexation. The maximum qualifying amounts will be frozen at the level of tax year 2015 (income year 2014) and thus no longer indexed going forward. The reduced qualifying amounts for the tax deduction for mortgage loans concluded as from 1 January 2015 will also be frozen (and thus not subject to indexation).

In case a first mortgage loan was concluded by a taxpayer for his own dwelling prior to 1 January 2005 (old system of tax benefits) and a second mortgage loan (for the renovation of this dwelling) would concluded as from 1 January 2015, the latter will no longer give rise to the application of tax benefits for interest payments and capital redemptions under the old system. Indeed, the taxpayer will no longer be able to make a choice for the benefits of ‘building savings’ and ‘additional deduction of interest’.

As of assessment year 2015 interest paid in relation to a loan for an own dwelling but which is not eligible for the corresponding regional tax reduction, can no longer be deducted from the taxpayer’s other immovable income (federal competence). However, at the level of the Flemish region which states that a tax reduction for the interests paid will still be possible.

Surcharges: If the regional surcharges (calculated on the ‘reduced federal tax’) would not be sufficient to offset the regional tax reductions, it will be possible to deduct the remaining amount of the regional tax reductions from the federal personal income tax (overflow mechanism).

Win-Win loan: As from assessment year 2015, the Flemish tax reduction for a win-win loan is converted into a regional tax credit which can be offset against the personal income tax and which is refundable. This tax credit will only be granted if the creditor has his fiscal residence in the Flemish region on 1 January of the assessment year. Although some have been abolished, other conditions remain unchanged until further notice.

B.2. Brussels Region

At this moment no changes are known. It is anticipated that the Brussels Region would not apply immediate changes (e.g. with respect to the tax benefits in relation to mortgage loans for the own dwelling). This “non-intervention” will create a competitive advantage for (taxpayers who are resident in) the Brussels Region, compared to (the the tax benefits received by tax residents of) the Flemish Region.

B.3. Walloon Region

The Decrees of 11 December 2014 and 12 December 2015 include the following changes:

Regional tax reduction for service cheques (i.e. titres services / dienstencheques): the amount of the qualifying expenses made with regard to service cheques will be determined differently (i.e. in a three-step approach). This new calculation method will reduce the amount of the qualifying expenses (and thus the actual tax reduction) significantly. Please note that the maximum amount (EUR 1.400,00) and the percentage (30%) of the tax reduction will not change.

Regional tax reduction for burglary and fire: the tax reduction for expenses made with regard to the security of a home against burglary and fire will be abolished as from income year 2015 (assessment year 2016). Consequently, only expenses made until 31 December 2014 will be eligible for this tax reduction.

Regional tax reduction for an ‘own dwelling’- mortgage loans concluded as from 1 January 2015: the tax reduction in relation to interest payments and capital redemptions for an ‘own dwelling’ has been fixed at 40% for mortgage loans concluded as of 1 January 2015.

Regional tax reduction for an ‘own dwelling’ – mortgage loans concluded up to 31 December 2014: for mortgage loans concluded up to 31 December 2014 for an own dwelling, the tax reduction will still be granted at the marginal income tax rate (maximum 50%).

Surcharges: If the regional surcharges (calculated on the ‘reduced federal tax’) would not be sufficient to offset the regional tax reductions, it will be possible to deduct the remaining amount of the regional tax reductions from the federal personal income tax (overflow mechanism).

Other tax measures

Procedure and penalties

Increase of mutual trust between taxpayer and competent tax authorities in order to increase foreseeability. Focus on consultation and efficient settlement of disputes.

Harmonisation of tax procedures in order to safeguard legal certainty for the taxpayer.

Decrease of redundant high punishment in case taxpayer acted in good faith.

Differences between tax penal law and common penal law will be examined in order to abolish anomalies.

Reassessment of the VAT penalty system and interest for late payment.

Decrease of secret commission taxation of 309% (supra).

Social security

Social security contributions would decrease from 33% to 27% and even to 25%.

Excise duties

The excise duties on coffee, wine, liquors and energy would become subject to indexation.

Tobacco: the duties on tobacco would increase.

Diesel: the duties on diesel would increase.

VAT

Cross-border B2C supplies of e-services to Belgian customers will be subject to Belgian VAT as from 1 January 2015 (mere transposition of the EU VAT Directive).

Subjecting of plastic surgery (of a non-therapeutic nature) to a 21% VAT rate will be examined in a later phase.

The increase of the age requirement for the renovations of private dwellings from 5 to 10 years will be examined in a later phase.

Tax on stock exchange transactions

The current temporary increases of taxes on certain stock exchange transactions would become permanent. In addition, the percentages would increase.

Fight against fraud

The current fight against fraud would continue.

All the details of the above measures are not yet clear and are still subject to change.